IMF lifts 2010 world GDP view, flags Europe debt risk

By IBT Staff Reporter On 07/08/10 AT 4:16 AM

The International Monetary Fund upgraded its 2010 global growth forecast on Thursday on the back of robust expansion in Asia and renewed U.S. private demand, but warned the euro area's debt crisis posed a big risk to recovery.

The IMF said downside risks have risen sharply mostly because of financial market turbulence resulting from Europe's debt crisis, but a double-dip world recession was highly unlikely.

The IMF raised its 2010 world output forecast to 4.6 percent from 4.2 percent in April's review of the global economy, but kept its 2011 view unchanged at 4.3 percent.

The world economy shrank 0.6 percent in 2009 as a result of the global financial crisis.

The baseline forecast that we have, has nothing like a double dip, Olivier Blanchard, the IMF's chief economist, said at a briefing in Hong Kong for the organization's latest World Economic Outlook and Global Financial Stability reports.

Financial stocks have fallen this year on worries about the impact of the euro area's debt crisis and more lately on concerns that the U.S. recovery is faltering following a string of weak data.

In this context, the new forecasts hinge on implementation of policies to rebuild confidence and stability, particularly in the euro area, the IMF said in the reports.

While uncertainty about bank regulation has added to investor concerns, the IMF focused the majority of both reports on the implications of the euro zone sovereign crisis.

In the news briefing, Blanchard said the European bank stress test disclosures due on July 23 were an important step toward transparency but underscored that countries must return to a sustainable level of fiscal spending.

Under one scenario -- assuming shocks to the global financial system resulting from Europe's debt problems are as severe as those experienced in the wake of Lehman Brothers' failure in 2008 -- world GDP growth in 2011 would be reduced by 1.5 percentage points.

SOME 2011 GDP FORECASTS CUT

Persistent weakness in the U.S. housing and labor markets, euro zone debt problems and a slowdown in growth of manufacturing activity in Asia have made investors speculate the global economy will slow sharply for the rest of the year.

The IMF on Thursday cut its 2011 growth forecasts for Britain, Canada, the euro zone, emerging economies and Japan.

The euro area's 2010 GDP was seen expanding 1 percent, unchanged from April, although the 2011 GDP forecast was trimmed by 0.2 percentage point to 1.3 percent.

The 2010 U.S. GDP growth forecast was raised to 3.3 percent from 3.1 percent in April, and the 2011 growth forecast was increased to 2.9 percent from 2.6 percent.

The biggest downward revision to GDP forecasts was in Britain, which last month unveiled a plan to cut a record budget shortfall to almost nothing in five years.

The IMF expects 2010 GDP growth of 1.2 percent, down 0.1 percentage point from a previous forecast, and 2011 GDP to rise 2.1 percent, down 0.4 percentage point.

The biggest upward revisions to growth were in developing economies. Brazil's 2010 growth forecast was raised by 1.6 percentage points to 7.1 percent and its 2011 forecast was lifted by 0.1 percentage point to 4.2 percent.

It raised its 2010 forecast for China's growth to 10.5 percent from 10.0 percent.

POLICY CHALLENGE

The fund said the most prominent challenge for policymakers was to restore financial market confidence without choking recovery.

Indeed, governments in advanced economies around the world have been putting forth plans to shrink their outsized fiscal deficits in order to maintain the confidence of bond market investors, who have been demanding higher premiums to hold risk.

Those plans will have to be balanced with growth-friendly monetary conditions.

At a global level, policies should focus on implementing credible plans to lower fiscal deficits over the medium term while maintaining supportive monetary conditions, accelerating financial sector reform, and rebalancing global demand, the IMF said.

Asia was highlighted in the report.

An inventory-driven rebound in 2010 will fade to more sustainable growth across the region in 2011. However, trade and financial linkages to Europe pose risks for Asia.

The IMF said Asian central banks were well equipped to deal with potential market seizures with U.S. dollar swap facilities, and many governments in the region had room to loosen fiscal policy if needed.

Kenneth Rogoff, former chief economist at the IMF, said on Tuesday that he did not expect the global economy to slip back into recession, although there were prominent risks.

Rogoff, speaking at a conference in Hong Kong, also said China faced a property market bubble. Although officials were doing the right thing by trying to clamp down on real estate, the ultimate impact on the banking system was uncertain, he said.